Monthly Archives: July 2016

Recent research shows that UK household savings are forecast to fall to their lowest rate in over 50 years.

A report produced by the Centre for Economics and Social Research (CEBR) has forecast that UK household savings will fall to just 3.8% of disposable income this year, its lowest level since 1963. The ratio was nearly 12% as recently as 2010, as the graph above shows.

The same research found that nearly two thirds of the over-55s felt “confident and supported”, while just over a third of 35-44 year-olds felt the same way. The corollary was that 61% of the younger age group thought they were not saving enough for their future while 45% of the 55+ baby boomers took the same view.

The falling savings ratio has a variety of causes including the low/no wage growth many have experienced since 2008 and the increasing cost of housing. It helps to explain government initiatives, such as the Lifetime ISA, aimed at encouraging the under-40s to save.

If you are a member of the lucky baby boomer generation, then one reading from the research is that your children (and grandchildren) are relying more heavily than ever on an inheritance to bolster their finances. Increasingly, that is being accelerated to mean lifetime gifts ̶ witness the importance of the bank of Mum and Dad in many first time buyer housing transactions.

All of which means that your estate planning has also assumed more importance earlier than you might have expected.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax and trust advice.

When the personal savings allowance (PSA) was first announced in the March 2015 Budget, it all sounded quite straightforward:

If you were a basic rate taxpayer, you had a £1,000 allowance to set against savings income;

If you were a higher rate taxpayer, your allowance was halved, but your potential tax saving was still the same; and

If you were one of the 333,000 additional rate taxpayers, you had no allowance.

The reality has turned out to be rather different. For a start, the allowance is not a true allowance at all, but a nil rate band. Now another glitch has emerged as the relevant Finance Bill legislation works its way through parliament.

If you have one of those bank or building society accounts that give you regular reward payments, then those sums cannot be offset against your PSA. To be offset against the PSA, what you need the bank to pay you is interest, which counts as ‘savings income’, not a reward, which is an ‘annual payment’, not ‘savings income’. Alternatively, income from fixed interest unit trusts and OEICs can be offset against the PSA. However, for the current tax year, such interest is paid after deduction of 20% tax, meaning a reclaim may be necessary. From 6 April 2017, fixed interest fund distributions will be paid gross – as bank and building society interest is in 2016/17.

It remains to be seen whether the banks and building societies that pay rewards will revise their accounts to make them more tax-friendly. In the meantime, the PSA serves as a reminder that what looks like a simple tax change is often not so.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Tax laws can change. The Financial Conduct Authority does not regulate tax and trust advice.

Earlier this year, our very special friend and colleague, Dawn Hill-Willis, lost her brave fight against cancer.

We wanted to do a little something in her memory so decided to dust off our trainers and sign up for Cancer Research’s Race for Life 2016.

What a special way to remember our lovely Dawn – running in a sea of pink, her favourite colour, and raising lots of money for Cancer Research in her memory. We even bumped into a group of Dawn’s other friends half way around the course.

So far, Team RU Running For Dawn (Alli Marwood, Charlotte Brain, Jane & Lucy Canlin and Sarah Smithies) have raised a very impressive £1,170 for Cancer Research in Dawn’s memory. Worth a post race celebratory glass of Pimms we thought!

Huge thanks to everyone who has sponsored us. We really do appreciate your support. If you haven’t already donated, there’s still time. Simply click here to visit our Just Giving page.

It is not only BHS which is keeping the Pensions Regulatorbusy

The Pensions Regulator (TPR) has been in the headlines recently following the demise of BHS and the issues surrounding the store group’s £571m pension deficit.

The BHS pension problem stems in part from the type of scheme it used to offer its employees – a final salary pension scheme. Over the years, strengthened legislation and poor investment performance have prompted most private sector employers to close such schemes to new members and now, increasingly, even to existing members.

The disappearance of the final salary pension was one of the reasons behind the introduction of automatic enrolment in workplace pensions. The aim was not to replace the old final salary scheme – that would have been too costly – but to ensure that there was at least some pension provision on top of the modest amount the state provides.

So there is a little irony in the fact that TPR is not only having to deal with the BHS fallout, but also the failure of employers to carry out their auto-enrolment duties. TPR’s latest review of auto-enrolment compliance revealed:

In the first quarter of 2016 the regulator issued 3,057 Compliance Notices, bringing the total since October 2012 to 7,834.

806 £400 Fixed Penalty Notices were sent out, three times as many as had been served in the previous 39 months. These penalties can be up to £10,000 a day for large employers (500 or more employees) and even for small employers (5-49 employees) accrue at £500 a day.

If you do not want to add to TPR’s workload and your business has not yet reached its auto-enrolment date, make sure you’re well-prepared. The accumulation of fines can mount up – one employer has already been hit for over £22,000.

Independent research shows that if you feel you’re paying more income tax than you used to, you’re probably right!

The Institute for Fiscal Studies (IFS) is an independent body that has established a reputation for objectivity in tax matters. Its former head, Robert Chote, is now in charge of the Office for Budget Responsibility (OBR), which vets the Budget numbers.

Recently the IFS looked at how the pattern of income tax payments has changed over the years and would change further by 2020. It drew some interesting conclusions:

Between 2007/8 and 2015/16, the proportion of the adult population paying income tax dropped from 65.7% to 56.2%. This was due to the combination of large increases in the personal allowance and generally low earnings growth.

While the number of taxpayers was falling, the share of total income tax paid by the top 1% of taxpayers was rising from 24.4% to 27.5%. This reflects the introduction of the additional rate and other measures such as the phasing out of the personal allowance, pension tax reforms and non-indexation of the higher rate threshold.

Since 2007/8 the increasing income tax burden on wealthier taxpayers “has been largely as a result of explicit policy choice” rather than a rising share of income. In the IFS view “it seems unlikely that this trend will unwind substantially over the next five years.”

At best, the government’s pledge to raise the higher rate threshold to £50,000 by 2020/21 “is only expected to hold constant the number of higher rate taxpayers” while those with incomes over £100,000 will continue to suffer from a frozen threshold for the phasing out of personal allowance and, at £150,000, the start of additional rate tax.

The IFS findings and predictions suggest that there will be little respite in the income tax burden as the result of government action. If anything, the opposite is true, because income tax is projected to rise as a proportion of total government revenues. As ever, if you want to reduce your tax bill, the answer lies in your own financial planning, not the Chancellor’s.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax and trust advice.

The Treasury has issued a consultation paper on changes to the taxation of single premium investment bonds following a long-running tax tribunal case.

Single premium investment bonds have long been a popular way of investing for both individuals and trustees. One of their plus points for many investors is that there is generally nothing to put on a tax return and no immediate tax to pay unless the total amount withdrawn on a regular or cumulative basis exceeds 5% a year of the original investment. This so-called 5% rule does not mean withdrawals are exempt from tax, as they are brought into the calculations when the bond is fully encashed or the life assured dies.

The 5% rule was introduced in the 1970s to simplify matters and replace a formula which could produce taxable amounts greater than the amount withdrawn. However, the simplification came with a sting in the tail for the unadvised: a large partial encashment early in a bond’s life could produce a substantial tax charge, even if the bond were showing no underlying profit.

This anomaly eventually prompted a tax tribunal case in which an unadvised Dutchman, Mr Lobler, who had moved to England found himself facing an effective tax rate of 779%. The First Tier Tribunal found in favour of HM Revenue & Customs with “heavy hearts”, but the Upper Tier Tribunal reversed the decision with the help of some creative thinking.

The Treasury has now issued a consultation on ways to prevent such unwarranted tax charges arising in the future. It has made three suggestions, all of which preserve the principle of the 5% rule, but aim to prevent unrealistic tax charges for large partial withdrawals.

The proposals are welcome, but would be unnecessary if all investors took advice before making withdrawals. For many years, life companies have issued bonds as a cluster of identical mini-policies, a structure which allows large withdrawals to be made by encashing in full a number of policies. This route avoids the tax trap surrounding partial encashments.

Mr Loobler had multiple policies, but no advice, so chose the wrong option. There is a lesson to be learned in his story…

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax and trust advice.

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Please note: All articles correct at time of going to publication. Older (archived) posts may no longer be correct or currently valid.